Grate Care Company specializes in producing products for personal grooming. The company operates six divisions, including the Hair Products Division. Each division is treated as an investment center. Managers are evaluated and rewarded on the basis of ROI performance. Only those managers who produce the best ROIs are selected to receive bonuses and to fill higher-level managerial positions. Fred Olsen, manager of the Hair Products Division, has always been one of the top performers. For the past two years, Fred’s division has produced the largest ROI; last year, the division earned an operating income of $2.56 million and employed average operating assets valued at $16 million. Fred is pleased with his division’s performance and has been told that if the division does well this year, he will be in line for a headquarters position.
For the coming year, Fred’s division has been promised new capital totaling $1.5 million. Any of the capital not invested by the division will be invested to earn the company’s required
After receiving the proposal and reviewing the potential effects, Fred turned it down. He then wrote a memo to corporate headquarters, indicating that his division would not be able to employ the capital in any new projects within the next eight to 10 months. He did note, however, that he was confident that his marketing and engineering staff would have a project ready by the end of the year. At that time, he would like to have access to the capital.
Required:
- 1. Explain why Fred Olsen turned down the proposal to add the capability of producing a crimping and waving iron. Provide computations to support your reasoning.
- 2. Compute the effect that the new product line would have on the profitability of the firm as a whole. Should the division have produced the crimping and waving iron?
- 3. Suppose that the firm used residual income as a measure of divisional performance. Do you think Fred’s decision might have been different? Why?
- 4. Explain why a firm like Grate Care might decide to use both residual income and
return on investment as measures of performance. - 5. Did Fred display ethical behavior when he turned down the investment? In discussing this issue, consider why he refused to allow the investment.
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Chapter 10 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Two departments within Cougar Gear Inc. are Production and Sales. Each department has a unique scorecard, as follows: The Production Department scorecard focuses on the learning and growth and internal processes perspectives. The Sales Department scorecard focuses on the learning and growth and customer perspectives. Both scorecards have the learning and growth performance metrics of median training hours per employee and average employee tenure. The Production scorecard has the unique metrics of production time per unit and number of production shutdowns. The Sales scorecard has the unique metrics of percentage of customers who shop again and online customer satisfaction rating. The performance targets for each metric are shown in the tan boxes just under the performance metrics. The actual achieved metrics are shown in the red boxes just below the tan boxes. When evaluating both departments, Cougar Gears management looks at the median training hours per employee and average employee tenure metrics and subsequently decides to give the Sales Department a large bonus while giving the Production Department a minimal bonus. a. Determine and define the type of cognitive bias Cougar Gears management has exhibited in this instance. b. Determine which department would have received the larger bonus had the companys management not been biased in the evaluation. c. Discuss one advantage and one disadvantage of using unique balanced scorecards for different departments or divisions of a company.arrow_forwardCoulson and Company is a large retail business that has a firm-wide balanced scorecard. Recently, management has discussed the need for the balanced scorecard to be more relevant to each individual department of the company. Specifically, management wants to come up with unique scorecards for its Public Relations and Inventory Management departments. For both departments, management recognizes that properly and efficiently training employees is important. For these purposes, management gathers data on the median training hours per employee and new employee performance review ratings. For the Inventory Management Department, management is focused on reducing stockouts (running out of certain inventory items) and keeping accurate inventory counts. For these purposes, the company tracks the number of back orders and discrepancies between the physical and record counts of inventory, respectively. For the Public Relations Department, management is focused on improving the publics CSR image of the company and attracting new customers. Management measures these objectives using Forbes CSR Rating of Coulson and Company and the number of new customers, respectively. a. Identify the term for Coulson and Companys plan to create unique balanced scorecards for its individual departments. b. Draw the unique balanced scorecards of each department. Identify the departments common and unique measures, and include all the elements of the balanced scorecard that you can in your drawings, given the information provided.arrow_forwardCamila’s Classic Clothes is a retailer that sells to professional women in the northeast. The firm leases space for stores in upscale shopping centers, and the organizational structure consists of regions, districts, and stores. Each region consists of two or more districts; each district consists of three or more stores. Each store, district, and region has been established as a profit center. At all levels, the company uses a responsibility-accounting system focusing on information and knowledge rather than blame and control. Each year, managers, in consultation with their supervisors, establish financial and nonfinancial goals, and these goals are integrated into the budget. Actual performance is measured each month. The New England Region consists of the Coastal District and the Inland District. The Coastal District includes the New Haven, Boston, and Portland stores. The Coastal District’s performance has not been up to expectations in the past. For the month of May, the district…arrow_forward
- Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…arrow_forwardHorsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…arrow_forwardHorsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achieving cost management goals. This necessitates highly accurate support department cost allocation. Management has also stated that it has the means to implement as complex a method as necessary. The general manager over the Mid-Size D wants to get a good idea of what factors are driving the costs of the support departments in order to make accurate cost allocations, so finding accurate support department cost drivers is important. Support department costs include Janitorial ($163,100) and Security ($285,400). The Janitorial costs vary depending on the number of vehicles produced, increasing with larger production volumes. Security costs are fixed based on the size of the lot, and do not change with respect to how many vehicles are in the…arrow_forward
- TAC Industries, Inc. sells heavy equipment to large corporations and federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to the government are determined on a cost plus basis, where the selling price is determined by adding a fixed markup percentage to the total job cost. Tandy Lane is the cost accountant for the Equipment Division of TAC Industries Inc. The division is under pressure from senior management to improve operating income. As Tandy reviewed the division's job cost sheets, she realized that she could increase the division's operating income by moving a portion of direct labor hours that had been assigned to the job cost sheets of corporate customers onto the job order cost sheets of government customers. She believed that this would create a "win-win" for the division by (1) reducing the cost of corporate jobs, and (2) increasing the cost of…arrow_forwardHobart, Evans, and Nix is a small law firm that contains 10 partners and 12 support persons. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments - the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the year, the firm's management made the following estimates for the year:Department Research and Documents Litigation Research-hours 31,000 — Direct attorney-hours 11,800 23,400 Legal forms and supplies £ 21,100 £ 6,700 Direct lawyer cost 593,300 1,186,700 Departmental overhead cost 930,000 474,680 The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct lawyer cost.The costs charged to each client are made up of three elements: legal forms and supplies used, direct lawyer…arrow_forwardCompany B uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows. Planes Taxis Limos Service revenue $ ? $450,000 $ ? Variable costs 5,000,000 ? 320,000 Contribution margin ? 180,000 380,000 Controllable fixed costs 1,500,000 ? ? Controllable margin ? 70,000 176,000 Average operating assets 25,000,000 ? 1,600,000 Return on investment 12% 10% ? InstructionsDetermine the missing pieces…arrow_forward
- Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particleboard division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particleboard plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, “Determining the percent complete always requires…arrow_forwardWinkle, Kotter, and Zale is a small law firm that contains 10 partners and 12 support persons. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments—the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the current year, the firm's management made the following estimates for the year: Department Researchand Documents Litigation Research-hours 20,400 - Direct attorney-hours 9,300 16,400 Materials and supplies $ 17,700 $ 5,500 Direct attorney cost $ 430,100 $ 799,400 Departmental overhead cost $ 714,000 $ 311,766 The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct attorney cost. The costs charged…arrow_forwardBest Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $645 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $245 per hour, which is what Corporate pays its associates. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot…arrow_forward
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